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How does investment property work?

March 13, 2018 8:00 am by Upside

Australia is in love with property, and especially with property investments. For many, especially once they’ve bought their own home, investing in property is the preferred way to increase wealth, and a stepping stone towards other investments. But before you dive in, here’s what to look for when buying an investment property and some of the need-to-know facts of property investment:

Ensure that you’ve got the finances sorted out

There are potentially many hidden costs in property investments – everything from stamp duty and solicitors’ and conveyancing fees to maintenance, insurance and the possibility that you might have a period during which the property has no tenants and is therefore not generating income. There are plenty of resources available to beginner property investors that can help you calculate the cost of the mortgage and the potential yield (that is, the profit made after paying the mortgage and expenses, as a percentage of the property cost over a year).

Sometimes newbie investors are keen to buy but not aware of the potential costs involved in buying real estate as an investment, meaning they may have to sell before they had planned, so make sure you’ve got a good financial buffer in case of unforeseen circumstances.

Know your tax responsibilities

Unlike property that’s your primary residence, investment properties attract tax. This means not only the stamp duty when you purchase, but also the capital gains tax if you make a profit when you sell – so make sure you factor this in when you’re assessing your financial situation. Investors should also be aware that that they may be taxed at the highest rate if their property investment is an additional income.

There’s also the potential for negative gearing if your property is left empty – that is, you may be able to use the loss made against an empty property to reduce your taxable income. You can also claim a tax deduction on any repairs or maintenance carried out while the property is tenanted. Make sure you speak to a knowledgeable tax accountant who can help you get to know what your liabilities and deductions will be.

Work out whether it’s for you

Investment properties can be a great way to create passive income – that is, money that’s generated from a product, business or investment that doesn’t require you to exchange your time for it. Not only is there the regular income of the rent – if it exceeds the cost of your mortgage – but there’s also the increased wealth that comes as a result of property market growth. With some luck and some planning, it’s possible to make a great return on your investment by buying at the bottom of a property cycle and selling when it’s booming without having to spend much time to make the money.

However, some investors like the hands-on nature of property ownership – it’s something you can see and touch, as compared with stocks and shares, which are intangible. Some landlords prefer to be the direct point of contact with their tenants, saving money on management fees.

Whether you choose to go the passive or the hands-on route, make sure it aligns with your goals, lifestyle and interests so that it doesn’t cause stress.

Do your homework

If you want to know where to buy an investment property, it’s essential to do your property research before investing in real estate. To be a successful property investor, it’s important that you buy a property that’s in an area with strong rental demand, such as those near employment hubs, universities, shopping areas and public transport. You should check rental property listings in the area you’re considering and speak to an expert real estate agent who can give you the low-down on the suburb.

Know when you should sell

Investing in property can be a great way to boost your wealth. While some like to set and forget, others opt for medium-term investment goals that help them on the way to other investments. For example, many sell investment property in order to help their kids buy a first home, or perhaps to put into superannuation or other investments.

If you’re considering selling an investment property, you’ll want to reduce the costs of doing so as much as possible. At Upside, we offer an all-inclusive flat fee that’s significantly less than the standard real estate agent commission and that takes the hassle and cost out of selling your investment property. Get in touch to find out how to sell investment property today.